The Barefoot Investor’s warning for 2021

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Wondering what to do with your money in the new year? Scott Pape has some tips and a warning for what could be in store.

This year has been a particularly wild one financially, largely due to the global pandemic. We’ve seen a recession start (and then technically end), the introduction of JobKeeper and mortgage repayment breaks, the share-market crash then rise and the introduction of a new early superannuation withdrawal scheme.

So what can we expect in 2021? Finder surveyed 40+ leading economists with most predicting Australia will stay out of a recession, property and stock prices will rise and the cash rate will stay incredibly low. However, these are just predictions and no one really knows what next year will look like (after all, no one predicted a global pandemic in 2020).

In his weekly e-newsletter, The Barefoot Investor Scott Pape said he believes the next year will be tough.

“My view is the next few years could be financially brutal for many businesses, for those workers who are laid off or underemployed, and for retirees who have had their investment income slashed. Like it or not, we’re living through a giant financial experiment: never has the world had so much debt. Never have interest rates been this low.”

The official RBA cash rate is at a historic low of just 0.10{cbf6da10fac2230370cea9448ed9872290737d25c88b8c8db3eefaf8c399e33d}, which means home-loan rates are also at historic lows (you can get a home-loan rate that starts with a 1). The RBA has made it clear rates will stay low for at least the next three to five years, as it’s encouraging people to borrow and invest.

This isn’t the best news for people trying to save money, however, as it means the interest rates offered on savings accounts are also incredibly low.

The Barefoot Investor’s top tip for 2021

Scott Pape’s number one tip for 2021 is to ask yourself if your money is safe and have a cash buffer in place. Despite the rates being low and the RBA encouraging people to borrow rather than store cash in the bank, Pape says it’s important to have an emergency fund.

“If you have money that you need to draw on in the next five years invested in anything other than a bank savings account or term deposit, you may well lose a chunk of it,” he wrote.

“The share market is not a safe place to hold your money in the next five years. However, it’s arguably the safest place to invest your money over decades, as it will outrun inflation.”

If you need to use the money in the next few years for something like school fees, a house deposit, medical bills or another large purchase, keeping it in the bank will ensure it’s still there when you need it. Yes, you could earn much higher returns if you invested the money in shares; however, you also run the risk of heavy losses too (like what we saw in March this year).

Pape said the bank was the safest place to store your emergency fund as it’s covered by the government.

“Keep any money you’ll need to spend in the next few years in a bank account (or term deposit) that is covered by the government deposit guarantee (up to $250,000). It’s not about the interest you earn (which is pitiful), it’s the sleep-easy factor of knowing you’ve got a backstop. That’s worth more to me and my mental health than any gain I could make in the market.”

The government deposit guarantee scheme means your cash up to $250,000 in an Australian bank is protected in the unlikely event that the bank goes under. In comparison, money in the share market isn’t guaranteed and if something were to happen to the company, shareholders are last in line to be paid back.

If you want to build up your emergency cash fund in 2021, our guide can help you work out how much you should aim to have in savings.